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September 6, 2011

ETF Volume Surges Most Since January 2008

Flight to safety leads many investors to ETFs that weren't available during earlier periods of volatility

Average daily trading volume for ETFs jumped 83% from July to August, as investors increasingly looked to make use of hedging and liquidity techniques in the face of greater market volatility.

According to Bloomberg, the SPDR S&P 500 ETF Trust, which tracks the benchmark measure of U.S. equities in particular, saw a 105% jump, to 394 million shares per day, for the same time period.

The news services notes, “U.S. stocks produced the biggest gains and losses of the year in August, including a stretch of four days when the Standard & Poor’s 500 Index alternated between rallies and declines of 4.4% or more.

“The reason for the increase in volume comes in lots of shapes and sizes,” Tom Lydon, editor of ETF Trends, told AdvisorOne in an interview Tuesday. “August was not a great month from a market standpoint, and people’s perception of the economy is increasingly negative. As a result, commodities ETFs (specifically gold ETFs) are seeing a surge in volume, as are treasury ETFs as a result of a flight to safety. Volatility-based ETFs, of course, are seeing an increase as well.”

Many of the current ETF offerings weren’t available during earlier periods of volatility, Lydon explained. He added that because of the liquidity factor inherent in the ETF design, institutions, advisors and individual investors are more opportunistic than they once were.

“I think we’re at a tipping point with the economy,” he said. “As little as six months ago, no one was talking about the possibility of a double-dip recession. Today, that’s a real possibility, but there are more options available to hedge against it. Take currency for instance: Few people would play in that realm because of the futures exposure. Today, with a currency ETF, more investors feel comfortable doing so.”

Bloomberg adds that the S&P 500 last month posted its biggest monthly loss since May 2010, while gold futures had their largest monthly advance since November 2009 and prices jumped to a record $1,917.90 an ounce. The SPDR Gold Trust briefly surpassed the SPDR S&P 500 ETF Trust as the biggest fund by market value.